Returns On Capital At Micro-Mechanics (Holdings) (SGX:5DD) Have Hit The Brakes




  • In Business
  • 2022-11-26 01:22:01Z
  • By Simply Wall St.
 

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, while the ROCE is currently high for Micro-Mechanics (Holdings) (SGX:5DD), we aren't jumping out of our chairs because returns are decreasing.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Micro-Mechanics (Holdings), this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.38 = S$25m ÷ (S$76m - S$11m) (Based on the trailing twelve months to September 2022).

So, Micro-Mechanics (Holdings) has an ROCE of 38%. That's a fantastic return and not only that, it outpaces the average of 25% earned by companies in a similar industry.

See our latest analysis for Micro-Mechanics (Holdings)

Above you can see how the current ROCE for Micro-Mechanics (Holdings) compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

There hasn't been much to report for Micro-Mechanics (Holdings)'s returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. Although current returns are high, we'd need more evidence of underlying growth for it to look like a multi-bagger going forward.

The Bottom Line

In summary, Micro-Mechanics (Holdings) isn't compounding its earnings but is generating decent returns on the same amount of capital employed. Since the stock has gained an impressive 66% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to continue researching Micro-Mechanics (Holdings), you might be interested to know about the 1 warning sign that our analysis has discovered.

Micro-Mechanics (Holdings) is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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